The frozen pension scheme question – can we let it go?
In a recent case involving the G4S Pension Scheme, the High Court was asked to decide on a question which has been troubling pension lawyers for some time.
That question was, if a scheme has been closed to the future accrual of benefits, but the amount of pension members will receive continues to be linked to their final salary, is the scheme a “frozen” scheme for the purposes of the Debt Regulations?
The G4S Pension Scheme issue in more detail
In the G4S case, two sections of the scheme had been closed to the continued accrual of defined benefits. This was achieved by the exercise of the scheme’s amendment power. The amendment power contained a restriction (known as a Courage restriction, named after the 1987 case which considered this issue) which meant that even after closing the scheme to future benefit accrual, the benefits received by members who were in service with one of the scheme’s employers at the time of closure would be based not on their salary at the date of closure, but at the date on which they left their employer’s service or retired, whichever came first.
The rules of the scheme were amended at the time of closure to provide that members who were in service at the closure date would receive the better of their pension, calculated at the date of closure and revalued to the date of retirement (ie if they were treated as “ordinary” deferred members) and their pension, calculated at the date they left service or retired, linked to their final salary.
The issue raised in the case was whether, as a result of the link to final salary, the relevant members were in fact active members (rather than deferred), in pensionable service.
Why does this matter?
In this case, it mattered because if the members were found to be in pensionable service (meaning that the scheme was not “frozen”), and if one of the employers ceased to employ any of those members with a salary link, a section 75 debt would be triggered, enabling the scheme trustee to require the employer to make good any deficit in the relevant section of the scheme, calculated on the buy out basis. This basis reflects the cost of securing benefits with an insurance company, and in many schemes can be significant and potentially unaffordable for the employer. However, the decision could have wider implications because the same (or very similar) statutory definitions apply in other areas.
What did the judge decide?
The decision turned on the meaning of “pensionable service” which for these purposes is defined as:
“service in any description or category of employment to which the scheme relates which qualifies the member (on the assumption that it continues for the appropriate period) for pension or other benefits under the scheme”.
The judge’s view was that the normal core meaning of pensionable service is service which earns the employee pension. It was argued on behalf of the members that they were still in pensionable service because they received pay rises, and that affected the amount of pension they ultimately received – ie the members were still “earning” pension. The judge disagreed, and held that the relevant members were not active members, they were not in pensionable service and therefore the scheme (or at least, the relevant sections of it) was a frozen scheme. There was not a risk, therefore, that a section 75 debt might be triggered by an employer ceasing to employ members who had the benefit of the final salary link.
Revaluation versus the final salary link
As noted above the same (or a very similar) definition of pensionable service is used in other legislation. One issue which often arises is whether members with a salary link have left pensionable service for the purposes of statutory revaluation (and so whether, when a scheme which has a Courage restriction on the amendment power is closed to future benefit accrual, you have to give members the better of the salary link and revaluation).
There have been differing views amongst lawyers on this point. This was not one of the questions to be decided in this case, but the judge commented that he thought the position was correct. He said that if an employer chooses to bring accrual to an end, the members become deferred members and are entitled to statutory revaluation. The final salary link is not something which is required by legislation, it is required where the scheme’s amendment power has a Courage restriction, and the final salary link has to be retained. While this means that a member gets the better of the two calculations, the judge did not accept that this meant the legislation should be given a different meaning.
In our view, based on these comments, it would be very difficult to argue successfully that a continued salary link is sufficient to stop statutory revaluation applying in such circumstances.
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